Analyst: Avaya layoffs a poor sign for its IPO

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September 26, 2012 at 2:00 PM

With Bernards-based business communications firm Avaya announcing it plans to lay off workers and consolidate services as a strategy to cut costs, a New Jersey analyst of initial public offerings said the company is hurting its chances to court potential investors if it moves on a previously announced effort to make its stock public.

"Cost-cutting measures naturally connote a company is in trouble, whether it actually is or not. Potential investors start asking, 'Is the company losing money? If they don't do cutbacks, will they be out of business or bankrupt?' " said David Menlow, president of Green Brook-based IPO Financial Network. "Sometimes, the reason for cutbacks is because a company has sold off divisions and is moving into other areas that make sense because its products or services have changed. But with growth potential in the communications industry not as prominent right now, for Avaya, it seems like the general attitude is, 'I can't believe they're still in business.' "

But an Avaya spokeswoman said the company has been implementing measures aimed at growing its divisions alongside its cost-cutting tactics, noting it acquired Tel Aviv-based videoconferencing services provider Radvision Ltd. on June 5.

Avaya "is positioned for growth, with strong offerings in the growth areas of enterprise mobility, video collaboration and the midmarket segment," spokeswoman Marijke Shugrue said. The cuts and acquisition "are part of our corporate strategic plan to pursue profitable growth."

According to a Sept. 24 filing with the Securities and Exchange Commission, Avaya has disclosed to investors it will downsize as a way to reduce costs between $135 million and $235 million during its fiscal 2013 — continuing the $105 million in cost cuts it already enacted on June 30, which end Sept. 30. Though it did not specify where the consolidation will take place, the company said it expects to produce pretax profit between $1 billion and $1.1 billion for fiscal 2013 as a result of it.

Fran Caulfield, research director of Mountain Lakes-based Insight Research Corp., said the company's plan is "certainly not positive," and since other businesses on the equipment side of New Jersey's telecommunications industry "continue to contract in terms of employment and resources and investment," Avaya's announcement signals "the company can't grow its revenue, so it's cutting costs to improve its bottom line."

"Avaya right now is in a challenging business. The services side of the industry is doing OK with modest growth, but the equipment side is not — even though it supplies products to services companies, like AT&T," Caulfield said. "Since companies always try to make their financials as strong as possible before they go public, this might be a last-ditch effort to do it."

Avaya's owners, private equity firms Silver Lake Partners and TPG Capital, registered for an IPO in June 2011, but the company still has yet to go public.